Russia-based Mechel OAO’s mining unit’s trading subsidiary – Mechel Carbon (Singapore) Pte. Ltd. – has signed a three-year coking coal supply agreement with South Korean steel maker POSCO Corporation (PKX - Analyst Report).
Under the contract, Mechel Carbon will be supplying 500,000 tons of coking coal per year to POSCO for three years. Mechel Carbon has also signed another one-year contract with POSCO, wherein, it will supply 200,000 tons of PCI coal in 2013. However, the prices of these contracts are not determined at the moment. They shall be adjusted mutually on a quarterly basis.
The agreement is a testimony of Mechel strategy of establishing relationships with the world's largest steel producers and positioning itself in diversified markets. A long-term, stable partnership with POSCO and other major companies will enhance Mechel’s position in the global metallurgical coal market by providing its coal mining enterprises with stable orders.
Mechel recently signed several loan agreements worth $1 billion with Gazprombank OAO, an important strategic partner. Mechel’s largest enterprises acted as borrowers for the deal.
Beloretsk Metallurgical Plant and Urals Stampings Plant in the steel section of Mechel signed a loan agreement for 1.7 billion rubles (roughly $54 million) and 1.6 billion rubles (roughly $50 million), respectively. The credit lines can be utilized with a potential of drawing down funds over a three-year period.
Mechel posted disappointing fourth-quarter 2012 results last month. The company incurred a consolidated net loss (attributable to shareholders) of roughly $1.11 billion for the quarter compared to a profit of $201.2 million a year ago. The results were hurt by weak demand. Adjusted loss (excluding one-time items) was $160.9 million in the reported quarter. Revenues for the fourth quarter came in at roughly $2.52 billion, down 13.9% from $2.9 billion in the year-ago period.
Mechel owns and controls essential infrastructure, including ports, rolling stock and power plants, which provide access to the export markets. However, Mechel could be handicapped because of its high debt and interest burden, and might not be able to keep up with its huge capital spending program. Moreover, Mechel is facing weak demand in Europe.
Mechel currently retains a short-term Zacks Rank #2 (Buy).
Other companies in the steel industry with favorable Zacks Rank are Gibraltar Industries Inc. (ROCK - Analyst Report) and Shiloh Industries Inc. . Both hold a Zacks Rank #1 (Strong Buy).